A Deeper Look into Outsourcing

Should independent financial advisors outsource? The 2015 Trends in Adviser Compensation and Benefits Study, produced jointly by the Financial Planning Association’s Research and Practice Institute and FA-IQ, seeks to answer this question. The report found that regardless of whether a firm embraces or rejects the idea of turning over part of its operations to third-party vendors, there’s rarely a change in sentiment.

Outsourcing is popular among registered investment advisors and hybrids, with few broker-dealers saying they do so. Few respondents at wirehouses say they outsource. Of the nearly 700 survey respondents, 42 percent of firms outsource one or more functions and 97 percent of those companies plan to continue doing so. Meanwhile, among the 58 percent of firms that don’t outsource, only 8 percent intend to do so in the future. Of the 42 percent that currently outsource, 38 percent said they plan to outsource more and 59 percent say their level of outsourcing won’t change.

Let’s take a look at what these firms are outsourcing. Technology and compliance appear to be the primary functions, followed by finance/bookkeeping, portfolio/investment management, marketing and administrative support. Advisors tend to outsource their back-office operations, investment manager research, product selection and portfolio monitoring, according to Investment Management Outsourcing: Impact on Clients, a 2014 study conducted by Northern Trust on financial advisors’ use of investment outsourcing.

Diane MacPhee, a certified financial planner and a business coach with DMAC Consulting Services in Manahawkin, NJ, believes that financial advisors are getting comfortable with the idea of outsourcing to handle specific areas, but could do more of it. “Financial advisors are getting past the idea that they need to do everything themselves,” she told Trust Advisor. “When they do outsource, it tends to be in one area, rather than a huge bold stroke of outsourcing a lot of functions.”

The advantage of outsourcing to an expert is the high quality of work and time spent on training, as most are CFPs with prior experience in financial planning.

As the next generation of advisors takes the reins, they will definitely change the profession, writes Bob Veres. “Next generation advisors will commoditize ongoing asset management services. Think of managing assets in two components: portfolio design and robo-advisor routine activities, like rebalancing and harvesting tax losses. Designing the initial portfolio customizes it to the client and the client’s goals and can be thought of as part of the initial planning engagement. The ongoing processes can be automated or outsourced altogether.”

Jude Boudreaux of Upperline Financial Planning in New Orleans is one of a growing number of NexGen advisors who have dropped their clearing firm relationship, the way the previous generation dropped their Series 7 license. “I don’t have the cost and expense of having a server or a clearing firm, because I’m not doing any trading,” he says. “I hired Symmetry Partners to handle the implementation and investment management for my clients who happen to have investment management needs and it all works. Other clients have money at Vanguard. We help them create initial allocations and they send us duplicate statements, and we can monitor those as well.”

Outsourcing can be beneficial. According to the Northern Trust survey, financial advisors who outsource investment management activities to external providers overwhelmingly say their decision was greeted positively by clients and in most cases, has led to business growth. This is certainly something worth considering.

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